Question

Part 1 (1 point) Suppose two friends, Laura and Kara, are each offered a job with Goldman Sachs. Rather than offering one salary, assume Goldman Sachs offers a choice between just a fixed salary and a smaller fixed salary plus a chance at an annual bonus. The table below shows the salary offers for the two friends.

Person	Salary A	Salary B
Laura	$60,000	$50,000 plus a 25% chance of a $40,000 annual bonus
Kara	$55,000	$49,000 plus a 30% chance of a $20,000 annual bonus

If Laura chooses Salary A, she is likely to be .

a. risk taker

b. risk neutral

c. risk averse

Part 2 (1 point) If Kara chooses Salary B, she is likely to be

a. a risk taker

b. risk averse

c. risk neutral

Answer 1

Expected value of Salary B, Laura ($) = 50,000 + 25% x 40,000 = 50,000 + 10,000 = 60,000

Expected value of Salary B, Kara ($) = 49,000 + 30% x 20,000 = 49,000 + 6,000 = 55,000

(1) (c)

Since Laura prefers the known salary that has same value as expected value of the uncertain salary, she is risk averse and prefers certainty.

(2) (a)

Since Kara prefers the unknown salary structure while it has the same expected value as the known salary structure, she is risk taker.

answered by: anonymous